Forecasting electricity prices and their volatilities using Unobserved Components

Abstract

Keywords:Conditional heteroskedasticity Dynamic factor analysis Iberian market Long run Non-stationary Short runThe liberalization of electricity markets more than ten years ago in the vast majority of developed countries has introduced the need of modelling and forecasting electricity prices and volatilities, both in the short and long term. Thus, there is a need of providing methodology that is able to deal with the most important features of electricity price series, which are well known for presenting not only structure in conditional mean but also time-varying conditional variances. In this work we propose a new model, which allows to extract conditionally heteroskedastic common factors from the vector of electricity prices. These common factors are jointly estimated as well as their relationship with the original vector of series, and the dynamics affecting both their conditional mean and variance. The estimation of the model is carried out under the state-space formulation. The new model proposed is applied to extract seasonal common dynamic factors as well as common volatility factors for electricity prices and the estimation results are used to forecast electricity prices and their volatilities in the Spanish zone of the Iberian Market. Several simplified/alternative models are also considered as benchmarks to ¡Ilústrate that the proposed approach is superior to all of them in terms of explanatory and predictive power.

A Hybrid Multi-Step Model for Forecasting Day-Ahead Electricity Price Based on Optimization, Fuzzy Logic and Model Selection

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“…Nevertheless, and despite the fact that it is a very interesting issue, the literature on longterm electricity price forecasting is scarce, and usually shortterm forecasting methodologies do not perform well when the forecasting horizon is extended. Successful attempts at medium-term and year-ahead electricity price forecasting are described by Vehviläinen and Pyykkönen (2005), Conejo et al (2010), Alonso et al (2011) and García-Martos et al (2011).…”

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